It’s after the tax deadline, and you probably have a lot of documents left over but which ones do you keep?
Here are some wise tips from Patricia Sabatini’s “What Documents Taxpayers Should Keep After Filing Their Return”:
In general, taxpayers should keep a copy of their tax returns and supporting documents — everything from receipts for charitable donations to mileage logs to paperwork showing payments for mortgage interest and property taxes — for a minimum of three years from the tax-filing deadline.
Typically, that’s how long the Internal Revenue Service has to initiate an audit.
The agency has longer — generally up to six years — to initiate an audit in cases of fraud, say when a taxpayer fails to report a big chunk of income.
“Enrolled agents say keep all tax records for seven years just to be safe,” said Kim Lankford, contributing editor and columnist with Kiplinger’s Personal Finance magazine.
Ms. Lankford recommends keeping actual tax returns indefinitely, which includes 1040 forms and main supporting forms such as Schedule A for itemized deductions and Schedule B for interest and dividend income. Keeping those documents could help in a jam. She also says “They can provide clues to all kinds of things years in the future for things you might not have though of. [Historical] information that you can get form the IRS is limited.
Ms. Lankford explains that keeping old tax returns helped one of her colleagues successfully contest her Social Security benefits statement. It showed she hadn’t earned as much as she had in one year. She was able to produce her very old tax form and get credit. She adds that people who do not want to keep any paper records can scan the originals and keep them in a digital archive. (It never hurts to have a back up)
While most supporting tax documents can be safely pitched within 3-6 years, there are some that should be kept longer. Those include records relating to real estate, stock and mutual fund transactions, retirement accounts and business or rental property that help set a cost basis.
For example, it’s good practice to keep records of the purchase price of a home and the cost of any major home improvements.
Wisdom from Ms. Lankford, “You generally aren’t taxed on home-sales profits if you’ve lived in the home for at least 2 of the past 5 years and your profit is less than $250,000 if single or $500,000 if married filing jointly.”
But for anyone living in a home for a shorter time or having a bigger profit, adding major home improvements — not basic repairs — to the cost basis of the home can reduce the taxable gain.
Anyone getting ready to throw out tax-related or other personal documents should take care to do it the right way to limit their exposure to identify theft. Thieves know this is prime time for chucking old documents, and they can piece it together from ripped trash. The IRS recommends that paper documents get cross-cut shredded into strips not exceeding 5/16 of an inch wide, or burned. Basically, you want to turn the paper into confetti or let it burn, baby, burn.
Magnetic records are a different story. The IRS recommends a combo of overwriting and degaussing, followed by incinerating, shredding, pulverizing or grinding. This sounds like a great way to take out some of that stress, or see fighting robots in action destroying your magnetic records.
Knowing what to keep and what to destroy can really save you from document overload. Go through everything and keep what is necessary, then have fun destroying the rest.